Undiscovered Managers
Wire-to-Wire Consistency
By Karen Dolan and Lawrence Jones
With their cheap fees and duration-neutral approach, Mary Ellen
Stanek and team earn shareholders steady returns with low risk.
A firm handshake.
That’s how bond managers Mary Ellen Stanek,
Gary Elfe, and Charlie Groeschell parted ways
with their longtime employer, Firstar Investment Research and Management Co., and
moved to R.W. Baird. After a two-hour
discussion with Baird CEO Paul Purcell, the
group shook hands (there was no formal
contract), and the seeds of a lasting partner-
62 Morningstar Advisor Winter 2008
ship were planted. Eight years later, the move
to Baird has proven to be good for the team
and for those who have invested in its funds.
A Homegrown Milwaukee Team
Stanek, Elfe, and Groeschell have long been at
the heart of the team. The trio have been
managing money together for more than
25 years. You’d be hard-pressed to find many
investment teams that have lasted as long.
In addition to guiding the bond team, Stanek
also serves as Baird Advisors’ chief investment
officer. She has managed fixed-income
assets for 28 years and has cultivated more
than just a strong track record. The team she
oversees is several layers deep now, but it
remains focused on serving investors.
Stanek has a welcoming aura, and her
personality more than fits in well with Purcell’s
humorously stated “no jerks” hiring policy (not
the exact term he used). In fact, the environment at Baird Advisors’ downtown Milwaukee
offices in the U.S. Bank Center (at 42 stories,
the tallest building in Wisconsin) is friendly and
collegial. Members of the team, from the most
junior all the way to Stanek, are comfortable
tossing around their ideas and opinions.
Everybody’s input matters. It’s not surprising,
then, that since 2004 Fortune magazine has
recognized Baird as one of the “100 Best
Companies to Work For.”
face. “It’s all about us being unselfish
and having a value-added proposition,” she
says. “The low fees put the funds on parity
with our separate accounts.” And low fees
have helped put returns ahead of the competition without forcing management to take
a lot of risk.
Looking to Risk First
13000
Stanek’s approach to managing money is partly
the result of how and when she began her
12000
career. Initially, she resisted the path to finance.
Her father was a banker, and Stanek wanted
11000
And that’s the exact kind of atmosphere Stanek
to try something different, law perhaps. Yet,
was hoping to cultivate at Baird and one
after graduating from Marquette University in
10000
of the reasons she left Firstar. She wanted to
1978, she took an entry-level position on
add investment resources and build a team
the money-market team at First Wisconsin
that could carry on for a very long time, and she
(which later became Firstar) and never looked
didn’t want pressure to grow margins. Since
back. While there, Stanek researched a
joining Baird, the core fixed-income team
new concept at the time, called “duration”
has grown to more than a dozen professionals.
(a measure of interest-rate sensitivity).
“I’m worrying about building succession more
than two layers down,” Stanek says.
In the late 1970s, inflation was running higher
than 13%, while short-term interest
The Fight for Basis Points Began with Fees
rates (measured by the federal funds overnight
The group came to Baird heavy with talent, but
lending rate) were 11% and soon to be
light in assets. Stanek, however, wasn’t
much higher, as the Fed struggled to regain
jumping up and down demanding marketing
control over an economy mired in stagflation. It
support to attract assets. She took a much less
was in this context—what Stanek has called
traditional approach for a manager and
“the worst bear market for bonds”—that she
demanded the bond funds they launch at Baird
got her start investing in fixed income.
charge low fees. While that stance raised
some eyebrows, as some at the firm were
These formative years left their mark on how
against the idea of a low-cost structure, Stanek
Stanek and the team view risk. The team
stood firm, and Purcell backed her. In fact, at
decided in 1985, while still at Firstar, to take
0.30%, Baird’s bond funds are among the least
one of the bond market’s largest risks
expensive options for retail fund investors.
effectively off the table. They made the pivotal
decision to move their strategies to a
“Mary Ellen’s business model is the best I’ve
duration-neutral approach, not viewing
seen,” Purcell says. “My job is to not screw
interest-rate bets as a reliable way to
that up.” As a result, he not only signed off on
consistently add value. Thus, when managing
low fees but has also supplied the team with
their flagship fund, Baird Aggregate Bond
the resources it needs and has never asked
BAGIX, the team pegs the fund’s duration to
it to shoot for growth in margins or assets,
that of the Lehman Brothers U.S. Aggregate
instead focusing on building the business “one
Bond Index.
client at a time” to ensure sensible growth.
The team views their benchmarks as worthy
Stanek clearly understands the constant fight
competitors—a sensible posture, given
for incremental returns that bond managers
how many bond managers fail to beat them
Mary Ellen Stanek
Baird Aggregate Bond Inst
BAGIX
$13K
12
11
03
LB Aggregate Bond
04
05
06
07
Category
Intermediate-Term Bond
5-Yr Anl Total Rtn (%)
5.16
Morningstar Rating
QQQQQ
5-Yr Anl Investor Rtn (%)*
5.29
Minimum Investment
$25,000
Investor Rtn Rank Category
9
Expense Ratio (%)
0.30
Jan-03
Jan-04
Stewardship Grade
Jan-05
—
Jan-06
Jan-07
Feb-03
Mar-03
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Mar-04
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05
Sep-05
Oct-05Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
*Dollar-weighted return that measures how the typical investor in
Dec-03
Feb-04
Dec-04
Dec-05
the fund fared.
Data asNov-04
of Dec. 31, Nov-05
2007.
over time. They will spend considerable
time and energy understanding the index and
how best to beat it. The team attempts
to add value through sector allocation and
security selection. And they try to accomplish
this while taking only modest credit risk.
Inching Ahead, a Few Basis Points at a Time
Given this low-risk approach to managing
money, Stanek’s team is clearly not going to
make its money in one fell swoop. “This
is a game of inches,” Stanek says. “Our small
size allows us to do little things.”
For example, the team pays close attention to
trading costs and opts for a lower turnover
strategy than its peers have. It is also studying
how it can better deal with cash flows in and
out of the fund. Because the team doesn’t
make bets on the direction of interest rates, it
MorningstarAdvisor.com 63
Undiscovered Managers
Mary Ellen’s business model is the best I’ve seen. My job is to not
screw that up.
Paul Purcell, CEO of R.W. Baird
wants to ensure that cash flows don’t throw
that off, even for a day. While such small
measures may not seem worth the time for
larger funds that take bigger bets, the team
here is fighting for every last basis point.
and member of the Green Bay Packers Corp.
board of directors, invests part of the Packers’
Preservation Fund with the Baird team. “We
knew about the team’s integrity, we knew their
Firstar record, and knew they are risk averse,”
Gallagher says, “but even though they
didn’t take an inordinate amount of risk, they
always seemed to beat the benchmark.” Over
the years, the Packers also have had an
investment banking relationship with Baird,
which helped with raising the capital required
to renovate Lambeau Field.
Jere McGaffey, a retired partner of Foley &
Lardner in Milwaukee and a trustee for
multiple trusts, believes in that approach. He
has invested with this team for more than 15
years. “For a while, we had two bond
managers,” McGaffey says. “As time kept
going on, we felt Mary Ellen’s team was
superior. When they left and went to Baird, I
followed them. I like the basic philosophy:
working off an index and trying to add some
value to it. In any one year, somebody who has
taken a bet on interest rates and was right is
going to look better. When you look at Baird’s
results over many years, though, they look
very good.”
Investing in Family
Stanek’s track record is even more impressive
when her other accomplishments are
considered. She and her husband have raised
three children, and she is actively involved
in the community. She sits on several
charitable boards, including that of the Boys
and Girls Club of Greater Milwaukee. She’s the
board chairwoman of her alma mater,
Marquette University. Stanek says that all
these things have made her a better manager,
Robert Gallagher, former president and COO of
Associated Banc-Corp. in Green Bay, Wis.,
Better Than the Index: Returns of Baird Aggregate Bond Fund minus the
returns of the Lehman Brothers U.S. Aggregate Bond Index over rolling threeyear periods since the fund’s inception.
2%
1.6
not worse. She’s gained perspective on
investing while building the team the right way.
This fact is illustrated in the recent hiring of
Meg Hegarty, who had interned at Baird
years ago. Hegarty had moved on to work for
the asset-backed securities team at
Deerfield Capital Management in Chicago,
focusing on the management of collateralized
debt obligations. The Baird team wanted
to add to its mortgage- and asset-backed
research efforts, and Stanek knew just whom
she wanted for the post. Hegarty jumped at the
offer. And while many might think a Milwaukee-based firm would have trouble attracting
talent, Baird has found plenty of impressive
homegrown individuals to fill its investment
ranks and, in cases like Hegarty’s, has attracted
people from larger cities.
Yards of Success in a Game of Inches
In the end, the measure of the Baird team’s
success is best illustrated by the results they
have delivered shareholders over time in
offerings like the Aggregate Bond fund.
While it might be tempting to ascribe much of
that fund’s success to its low cost, it’s clearly
not the whole story. The fund’s price tag
provides it an advantage over costlier rivals,
but when examining its five-year gross total
return (that is, the return before fees are taken
out) through Dec. 31, 2007, it still beats
70% of rivals. After fees, the fund jumps to
beating 87% of peers.
1.2
The team has talent, even apart from the fee
edge, enough so that investors might also want
to make a handshake deal of their own.
.8
03
04
Data as of Nov. 30, 2007.
64 Morningstar Advisor Winter 2008
05
06
07
Karen Dolan, CFA, is a senior mutual fund analyst
with Morningstar. Lawrence Jones is a fund analyst
with Morningstar.
Information through 12/31/07
The Morningstar five-star rating for the Institutional Class Baird Aggregate Bond Fund is the overall rating received among 967 Intermediate-Term
Bond Funds. The fund received four stars for the three-year period among 967 Intermediate-Term Bond Funds and five stars for the five-year period
among 826 Intermediate-Term Bond Funds.
The overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with a fund’s three-, five- and
ten-year (if applicable) Morningstar Rating metrics.
For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk- Adjusted Return measure
that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads and redemption fees), placing more
emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive five stars, the next 22.5%
receive four stars, the next 35% receive three stars, the next 22.5% receive two stars and the bottom 10% receive one star. Each share class is
counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages. Past
performance is no guarantee of future results.
The average annual total returns for the Institutional Class of the Baird Aggregate Bond Fund as of December 31 are 5.61% for the one-year and
5.16% for the five-year periods and 6.66% since its September 29, 2000, inception date. The expense ratio is 0.30%.
Performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal
value of an investment in the fund will fluctuate so that an Investor’s shares, when redeemed, may be worth more or less than their original cost.
The fund’s current performance may be lower or higher than this performance data.
Investors should consider the investment objectives, risks, charges and expenses of the fund carefully before investing. This and other information is found in the prospectus. For a prospectus or for performance current to the most recent month-end, contact Baird Funds directly at
800-444-9102 or contact your Baird Financial Advisor. Please read the prospectus carefully before investing. The fund’s current performance may
be lower or higher than this performance data.
Investors should consider the investment objectives, risks, charges and expenses of the fund carefully before investing. This and other information is found in the prospectus. For a prospectus or for performance current to the most recent month-end, contact Baird Funds directly at
800-444-9102 or contact your Baird Financial Advisor. Please read the prospectus carefully before investing.
The fund maintains securities with longer maturities in order to provide a greater potential for return. This may also increase the fund’s interest rate
risk. Generally, the value of bond funds rises when prevailing interest rates fall and falls when interest rates rise.
This story must be accompanied with performance data current through the most recent quarter. For Morningstar ratings data current through the
most recent month-end, please visit www.bairdfunds.com.
To learn more, callTo
866-44BAIRD
visit
us online atorwww.bairdfunds.com.
learn more, or
call
866-44BAIRD
visit us online at www.bairdfunds.com.
©2008 Robert W. Baird
& Co.
Incorporated.
SIPC.
©2008
Robert
W. Baird Member
& Co. Incorporated.
Member SIPC.
First Use: 2/2008 MC-23237
First Use: 2/2008 MC-23237